While investors overall are still lukewarm on U.S. stocks, one section of the market they have been keen on in 2012 is dividend stocks — perhaps too keen, says Jason Zweig.
In his Intelligent Investor column for The Wall Street Journal, Zweig says that so far this year, investors have put a net of $9 billion into mutual funds and exchange-traded funds focused on U.S. stocks that pay stable, high or rising dividends, according to EPFR Global; all other U.S. stock funds have a combined net outflow of $7.3 billion.
“Many of the investors joining the dividend stampede appear to be motivated by the low interest rates mandated by the Federal Reserve, which have led to a yield famine among traditional income investments like bonds, certificates of deposit and money-market funds,” Zweig writes, adding that others may be chasing performance, since high-yield stocks fared well last year. But, he says, “Think twice before you jump on the bandwagon. While dividend-oriented funds are a perfectly legitimate way to invest in stocks, you shouldn’t mistake them for bonds.” While it may pay a nice dividend, there’s no guarantee you’ll get your capital back with a dividend stock, he says.
In fact, while many believe dividend stocks are much safer than the broader market, Zweig says that’s not true. “In the long run, dividend-paying stocks are slightly less risky — and more rewarding — than the equity market as a whole,” he says. “In the short run, however, they can expose you to the risk of being in the wrong place at the wrong time.” And, he says unless Congress and the White House act, dividend tax rates could jump significantly next year. So, while there are reasons to buy dividend stocks, Zweig says not to see them as easy ways to generate income in a low-bond-yield environment.